Recently, Mr Blanchard, chief economist of the IMF, recently said authorities should not rule out another fiscal boost, despite debt worries. “If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself,” (1)
The economics behind this is that higher growth reduces government borrowing because it leads to higher tax revenues and lower spending. If fiscal stimulus increases growth, it will particularly help reduce the debt to GDP ratio.
The statement of Mr Blanchard is in sharp contrast to Jean-Claude Trichet of the ECB who recently stated.
“The idea that austerity measures could trigger stagnation is incorrect,… confidence-inspiring policies will foster and not hamper economic recovery.” – J.C. Trichet (double dip recession)
I have to say, since J.C. Trichet made that statement, I have not seen any evidence that spending cuts, (with prospects of lower wages, job losses and lost government demand) have not increased spending. If anything, confidence has fallen in recent years.
A big question is how much can the government borrow?